With Windows Struggling, Microsoft Relies on Office for Revenue

The stakes for Microsoft, which outlined the next version of its profitable Office suite today, are extremely high because that part of its business generates more revenue than any other, an analyst said today.

According to the company's earnings statements, Microsoft's Business Division -- the group that handles Office, as well as products tied to the suite including Exchange, SharePoint, Lync and the online-serviced Office 265 -- has been the firm's biggest revenue generator since the fourth quarter of 2010.

Over the last three-plus years, the Business group has been Microsoft's top money-maker in 10 out of 13 quarters.

"Windows isn't as reliable a revenue generator as it has been," noted Alan Krans, an analyst with Technology Business Research. "That's why Office has stayed out ahead."

The problem with Windows, experts have said, can be traced to sluggish PC sales -- Microsoft gets most of its Windows revenue from selling licenses to computer makers -- in part because customers are declining to buy new personal computers and instead are spending their money on tablets and smartphones, markets Microsoft is only now entering or which it's reaped little reward.

During the first quarter of 2012, for example, Business generated $5.8 billion, or 33.4% of Microsoft's total revenue of $17.4 billion. In the same period, the Windows and Windows Live Division raked in $4.6 billion, or 26.6% of the firm's revenue for the quarter.

Business -- nee Office -- has been even more impressive in its operating income results. Operating income is revenue minus expenses, before taxes.

Last quarter, Business produced $3.8 billion of the total $6.4 billion in operating income, or 59.1%. In other words, nearly 6 of every 10 dollars in pre-tax profit came from Office and its peripheral products. Windows, meanwhile, was less profitable: In the first quarter of 2012, that group contributed $2.9 billion, or 46.3% of the operating income. (Because some divisions lost money, the total percentages of operating income can exceed 100%.)

"The next version is huge, not only from a revenue perspective, but because so much revolves around Office in the enterprise," said Krans. "It's the portal, the central repository, connecting productivity workers."

The stakes are higher than ever for Office 15, the codename Microsoft's slapped on the next edition. Most analysts expect the final name to be Office 2013, with a ship date early next year, probably in late January or early February.

"They've lost control of the Windows control point," said Krans, talking about Microsoft's problems in what Apple calls a "post-PC" world, but that the company dubs "PC-plus." "With Office, they want to retain that dominance. So they have the most to lose if Office 15 doesn't sell, but on the other hand, it's their best shot because it doesn't have the competition that Windows faces now."